[Base Rate 1% Era] The End of Zero Interest Rates... Bank Loan Rates to Rise Further

End of the 'Ultra-Low Interest Rate Era'... Accelerated Normalization of Monetary Policy by Next Year
Mortgage Loans Expected to Surpass 6% Annual, Credit Loans 5% Annual

[Asia Economy Reporter Kim Jin-ho] The upward trend in loan interest rates, which began in earnest in the second half of this year, is expected to accelerate further. This is because the Bank of Korea held a Monetary Policy Committee meeting today and raised the base interest rate, signaling the end of the so-called 'ultra-low interest rate era.' With the financial authorities tightening loan regulations and the base rate being further increased, it is becoming a foregone conclusion that mortgage loan rates will surpass 6% per annum and credit loan rates will exceed 5% per annum.

According to the financial sector on the 25th, the Bank of Korea's Monetary Policy Committee held a meeting this morning and decided to raise the base interest rate by 0.25 percentage points from the previous 0.75% per annum to 1.0% per annum.

With the Bank of Korea pushing for normalization of monetary policy, loan interest rates are expected to rise rapidly for the time being. Additional base rate hikes are anticipated early next year following today's increase, which is expected to quickly push up market interest rates. Previously, when the base rate was raised once in August, major loan interest rates surged by more than 1 percentage point.

In fact, the average mortgage loan interest rates of the five major commercial banks have shown a clear upward trend, rising from 2.76?3.15% in August to 2.87?3.37% in September and 3.05?3.76% in October. The average credit loan interest rates also increased from 2.89?3.14% in August to 3.15?3.58% in October. These averages indicate the rising trend, but the actual loan interest rate increases felt by borrowers are much greater. The upper limits of mortgage and credit loan interest rates at major commercial banks are already in the mid-5% and high-4% ranges, respectively.

Especially since the Bank of Korea has announced additional base rate hikes early next year, the upward trend in loan interest rates is expected to accelerate. A financial sector official said, "As monetary policy has entered a normalization track, loan interest rates will inevitably continue to rise trend-wise for the time being."

The problem lies in the interest burden on borrowers. More than 80% of mortgage loan borrowers have variable interest rates, and investors who have engaged in so-called debt-financed investment (debt investment) through credit loans are facing an emergency.

For example, a borrower who took out a 300 million KRW mortgage loan in August with a 30-year term at 4% interest would pay about 1.43 million KRW monthly, but if the rate approaches 6% within the year, the borrower would have to pay about 1.8 million KRW monthly. This means a difference of 300,000 KRW in monthly interest burden within just 3 to 4 months.

According to the 'Financial Stability Situation' report released by the Bank of Korea in September, if the base rate rises by another 0.25 percentage points within the year following the August increase, household interest burdens are estimated to increase by 5.8 trillion KRW compared to the end of 2020.

The interest rate spread between deposits and loans, which has widened the most in 11 years, is also likely to expand further. This is because the financial authorities have stated they will not intervene, and additional base rate hikes are expected early next year following today's increase. According to the Bank of Korea, the deposit-loan interest rate spread based on balances was 2.14 percentage points at the end of September, marking the highest level since October 2010 (2.22 percentage points).

Accordingly, public dissatisfaction among ordinary citizens due to the sharp rise in loan interest rates is expected to grow further. Numerous petitions regarding the rapid increase in bank loan interest rates are already flooding platforms such as the Blue House's public petition board.